Should You Park Your Portfolio in Cash and Wait Out 2023? Investing Experts Debate Pros and Cons
The economic landscape has been quite uncertain in the past few months, with soaring interest rates, inflation and geopolitical tensions. And now, turmoil in the banking sector is also rattling markets and talks of a looming recession are getting louder.
Against that backdrop, it can be difficult for investors to navigate what to do with their investments and decide what is best for their money.
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One option is for investors to just park their portfolio in cash and wait out 2023, or until things stabilize a bit more. This is a trend several experts are witnessing.
“Ahead of a potential down economy in 2023, we’re seeing many investors wondering whether to park their portfolio in cash or explore different investment options with liquid capital right now,” said Billy Cho, Manhattan market leader at Citi. “The truth is, there’s no right or wrong answer, because everyone’s situation is different. The ‘right’ decision depends on each person’s individual financial situation, goals and risk tolerance. Ultimately, investors should carefully evaluate their unique circumstances and meet with a financial advisor (ideally) before deciding on a strategy.”
Benefits
According to Andrew Crowell, financial advisor and vice chairman of wealth management at D.A. Davidson, the primary benefits of “sitting on cash” are the peace of mind and flexibility it offers.
“Knowing that the funds are ‘out of harm’s way’ and not subject to the volatility of the stock market or tied up in a time-deposit allows savers to sleep at night and decide what and when they might feel more comfortable investing,” said Crowell.
Crowell added that since the Federal Reserve began raising short-term interest rates early last year, yields being offered by savings accounts and money markets are around 2% right now, which is up dramatically from the less than 0.25% being offered by some of these same programs only two years ago.
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“Some have defined market risk as ‘not having money when you need it.’ Having funds invested in the stock or bond or CD markets puts it out of arm’s reach and may require emergency funds to be liquidated at an inopportune time and/or with penalties if cash is needed. The liquidity of ‘sitting on cash’ removes this worry,” he added.
Plus, according to Bobbi Rebell, CFP, founder, Financial Wellness Strategies and author of “Launching Financial Grownups,” there is a reason they say cash is king.
“When economic times are uncertain, having liquidity is essential and a smart move. You want access to your money and nothing gives you more access than having cash. And as we have learned from the recent banking downfalls, cash in a bank account is also insured up to $250,000 by the FDIC,” added Rebell.
Drawbacks
So while it might be wise to play it safe as an investing strategy for the time being, the drawbacks of sitting on cash are the loss of available interest and/or growth which other opportunities may afford.
For example, Crowell said that short 6-, 9- or 12- month FDIC insured CD rates now offer interest at about 5%, which is more than double that of most money markets or savings accounts.
And let’s not forget that sitting on cash means the loss of purchasing power due to inflation, which currently stands at 5% according to the latest Consumer Price Index (CPI).
“This means that a saver needs to earn at least that rate in order to maintain their purchasing power. The cost of playing it safe is actually risky as it almost certainly guarantees an erosion of those dollars sitting in cash for a long period of time,” said Crowell.
Alternatives
According to Angelo Kourkafas, senior investment strategist at Edward Jones, with the end of Fed tightening now in sight, savers and investors should look to lock in the highest yields in more than a decade with a CD, money market fund, or short-term government bonds.
“These alternatives offer more attractive yields than traditional savings accounts. We also see an opportunity to add longer-term quality bonds. These bonds not only secure high income for longer, but also may appreciate if yields eventually start to move lower if the economy slows and the Fed pivots to rate cuts down the road,” said Kourfakas, adding that despite cash currently offering an attractive return in nominal terms, over the long-term he expects higher risk to be rewarded in the markets and cash to be a drag on investment performance.
HYSAs and CDs
A HYSA is a savings account with a variable interest rate typically higher than retail brick-and-mortar banks, and interest is compounded daily and posted to accounts monthly, according to American Express.
“The benefits of putting money in a HYSA — or other stable account — is two-fold,” said Ben Reid, GM, Spend and Save at M1 Finance. “You can still capture solid returns inside of a high-yield savings account, or other investment product that has safe returns.”
And assuming it is issued by an FDIC member bank, balances are insured up to $250,000, or sometimes even more. “In the case that market conditions continue to deteriorate or the current banking turmoil continues, you can rest easy that your funds are safe — up to the insured limit offered by your bank,” added Reid.
Citi’s Cho echoed the sentiment, saying there are a lot of attractive savings account rate options available now, with rates being at the highest they’ve been in years.
“HYSAs and CDs are both attractive options to hold cash, each offering different levels of liquidity, security, and potential returns,” said Cho, adding that HYSAs have the added benefit of great liquidity for quick access to cash in case of emergencies or new investment opportunities.
“An investor should also consider CDs, which, similar to HYSAs, provide yield — but often need to be held for a specific timeline or maturity. One could ‘ladder’ a CD with different tenures for similar benefits as HYSAs but with less liquidity,” he added. “Ultimately, it’s a matter of personal choice and determining what’s right for meeting your financial goals. For me, holding cash in a high-yield saving account and a no-penalty CD offer two attractive and beneficial ways to balance my overall portfolio.”
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